Here's what investors need to know about Rio Tinto's US$6.7bn bid for Arcadium Lithium

Rio Tinto's (ASX: RIO) US$6.7 billion (A$9.9 billion) acquisition of Arcadium Lithium will leapfrog the mining giant into the top five of lithium plays, according to Benchmark Minerals Intelligence. The US$5.85 per share offer represents a substantial 108% premium to Arcadium's closing price on Friday, 4 October.

This bid is lower than the implied value of the previous Allkem and Livent merger, which was valued at US$10.6 billion in May 2023. But that is likely because lithium prices have declined approximately 65%.

Arcadium's Perspective: Certainty Amid Volatility

For Arcadium, the deal provides financial stability in a challenging market environment. Macquarie's forecasts (as of 3 October 2024) paint a sobering picture of the company's near-term prospects:

Source: Macquarie October 2024

The forecasts suggest sluggish lithium prices over the next two years and a challenged balance sheet as the company seeks to advance several projects across the portfolio.

"Without Rio Tinto, Arcadium shareholders would have likely had a bump ride to positive free cash flow in 2028," Citi analysts said in a note on Thursday, adding that "Arcadium would also likely need cash from a sell-down of Galaxy."

Rio Tinto's Big Leap

For Rio Tinto, the acquisition marks a significant expansion of its lithium portfolio, complementing its existing Rincon Project and the controversial Jadar deposit.

The Rincon Project was purchased in 2022 for US$825 million and a further US$335 million has been committed to support a full-scale starter plant operation. The starter is forecast to come online in the fourth quarter of 2024.

Rio Tinto discovered the Jadar deposit in 2004. In 2022, the Serbian government revoked the project's exploration license. Rio remains hopeful of winning over community support given the project's modest environmental footprint and value-add for the local economy.

Citi says the Arcadium acquisition offers a more economical option than developing its own lithium assets, offering higher returns than a greenfield investment into Jadar. The deal also offers several strategic benefits:

• Chemical expertise: Arcadium is one of a few globally that can produce battery-grade chemicals and one of two LiOH producers in the US today.

• Asset quality: Arcadium has exposure to three top-tier resources in Argentina and fresh discoveries are lacking.

• R&D and technology: Arcadium is one of the few global producers of batter-grade chemicals and one of only two LiOH producers in the US, with plans to expand in Quebec.

Rio Tinto chief executive Jakob Stausholm told the Australian that "Arcadium brings huge skills to the table, particularly in processing capability ... This is a very fair price and it’s a good day for both the shareholders of Rio Tinto and Arcadium."

He also reiterated that the deal would not affect the company's dividend policy.

Valuation Debate

Blackwattle's Portfolio Managers Tim Riordan and Michael Teran have voiced strong opposition to the deal. In a letter to Arcadium's board on October 5, they urged rejection of any bid below US$8 billion, citing:

"Arcadium Lithium's share price has fallen 63 per cent this year on weak lithium markets and reached an all-time low last month. Global lithium markets appear to have bottomed out, with lithium chemical indices stabilising, and in our opinion, the timing of this potential sale could not be at a more value destructive period for shareholders."

On October 9, the fund managers reaffirmed their stance, stating:

"We are disappointed that the Arcadium Board and Management have not received the appropriate value for shareholders with this offer, and in our opinion, should consider walking from what we believe is an opportunistic offer."

"Arcadium's asset base is not easily replicable, recent external estimates of replacement costs are US$7.7 billion."

They have declared their intention to vote against the scheme of the arrangement, highlighting the contentious nature of the deal's timing and valuation.

Where to from here?

The deal has board support from both sides and is forecast to close in mid-2025, subject to approval from Arcadium shareholders, the Royal Court of Jersey and the usual regulatory approvals such as those from the Foreign Investment Review Board.

"We think Arcadium investors will likely support a cash price of US$6.7 billion. There are no major shareholders but TTC support would likely be important given the partnership at Olaroz," says Citi.

For context, Toyota Tsusho Corp (TTC) was a 15% shareholder of Orocobre and an exclusive sales agent for their Olaroz Lithium Facility in Argentina.

For now, at least, the deal is likely to face little resistance and the likelihood of a better offer is also relatively low.